Brian C. Gilbert | President/CEO
That is the question. In other words, is it time to buy your first home? I have heard opposing views on this recently, so I wanted to share my thoughts on this subject. There’s always uncertainty when entering into a transaction especially when it’s as big as buying a home. For most of us, it’s the biggest and longest financial commitment we may ever make. There are a couple of concerns that most of us have when it comes to buying our first home.
Right now, the mortgage interest rates are higher than what we’ve experienced in the recent past. There is no question that a 5% mortgage is not nearly as attractive as a 2.5% mortgage rate. However, it’s important to consider the nominal cost of borrowing. Nominal cost is the cost of credit compared to the inflation rate. If the inflation rate is 8% and your mortgage rate is 5%, your nominal rate is actually negative 3%. So, if you purchase a property that is not overpriced in today’s market, even though you are paying 5% on the mortgage, the value of the home is increasing at the 8% level, so you are still building equity in the home at 3%. Now there are other expenses to consider such as taxes, insurance, and upkeep, but those are factored into the cost of renting, as well.
The Real Estate Market
Another concern is what if the real estate market crashes? This can and has happened. Generally, this happens after a period of inflationary growth where there’s been a frenzy of exorbitant lending. That does not appear to be the case in this cycle. We will probably see the slowing of rising home prices as some buyers are priced out of the market or leave the market and the inventory of available homes increases. But I do not believe we will see the bottom fall out of the home market.
A basic tenet of building wealth is investing in things, like a home, which increases in value over time and avoiding things that decrease in value. One of the best “forced savings” a person can have is investing and building equity in a first home. After all, you will always have a housing expense – Rent or Mortgage – so why not invest in yourself and your long-term wealth? If you can save for the down payment and qualify for the mortgage, then it is time to pull the trigger and purchase your home.
Words of Caution
When you are purchasing a home, whether it’s your first or your tenth, there are a couple of things to keep in mind.
- Understand the requirements for upkeep and maintenance of the property you are buying, particularly on a pre-owned home. You may face large expenses such as replacing a roof or air conditioning system so it’s important to prepare for these expenses by building a rainy-day savings fund.
- Understand the costs of insurance and utilities to make sure it fits into your overall budget.
- Finally, if you don’t plan to be in a house for three to five years, then it may not be financially beneficial to buy a home because the costs associated with buying and selling may eat up any gain in equity.